Laid Off, With Retirement Almost in Sight

TARA SIEGEL BERNARD

Published: Friday, January 6, 2012 at 6:04 p.m.

Last Modified: Friday, January 6, 2012 at 6:04 p.m.

Achieving financial security in retirement is hard enough for most working Americans. But for those who lost their jobs just as the finish line was within sight, the whole notion may now seem out of reach.

“I have 40-something years of experience, and companies don’t want to pay for it,” said Barbara Saltsman, a former legal secretary who lives in Chittenango, in upstate New York.

Heather Ainsworth for The New York Times

Older unemployed people face the double whammy of declining home values and an investment portfolio that has been treading water, at best. But they have also lost the one stabilizing factor that was supposed to see them through: a paycheck.

That has forced many of these people — and there are nearly two million of them over age 55 — to make tough decisions about how to make up for the lost income, especially since it is taking them substantially longer than their younger peers to find work. In December, the average time someone 55 or older was unemployed was 52.2 weeks, according to the Labor Department; more than 210,000 others have simply quit looking.

Being unemployed for a year is enough to burn through even the richest of emergency savings funds. So if you have lost your job, the first step, as one financial planner put it, is to do financial triage. You need to look at your cash flow, figure out how much you have been spending and decide the minimum you absolutely need to get by.

“You cut as much as you can, and if you still come up short $500 a month, then you have to figure out the best place to get that money,” said Dan Danford, a financial planner in St. Joseph, Mo.

It may mean that you need to consider taking your pension a bit early, or finding a part-time job. But there are several other little-known tricks that will help you create a bridge of sorts until you either find work or manage to eke your way to retirement.

REASSESS CAREER POSSIBILITIES Though easier in theory than practice, you may consider a second career in an area that you enjoy, perhaps on a part-time basis, through much of your retirement. “It is not very often that we are forced to evaluate our career and to determine if we really want our old job back,” said Alan Moore, a financial planner in Racine, Wis.

He suggests thinking about it this way: Even if you earn only $500 a month working part time in retirement, it’s equivalent to having another $150,000 in the bank, assuming that you pull out 4 percent of that money annually, an industry standard. “Plus, it is much easier to earn $500 a month than save an additional $150,000,” he said, adding that he advises his clients to work with a career coach.

Joshua Gottfried, a financial planner in Glastonbury, Conn., worked with a client who had lost his job as a plant manager. Without his income, Mr. Gottfried calculated, his savings would need to earn an unrealistic 8 or 9 percent return to meet his retirement goals. So he and his wife decided to take 15 percent of their savings to start a construction company. “If he can make 15 to 20 percent on the money he put in the business, and he can make 5 or 6 percent on his passive investments, then it will net out,” Mr. Gottfried said.

SOCIAL SECURITY For many healthy people, it is almost always worth waiting until your “full retirement age,” at the very least, to begin collecting Social Security. But for those with few or no resources, collecting sooner may be the only option. There are a couple of workarounds, however, that may allow you to collect benefits on a spouse’s record, while your own benefits continue to accrue.

That is what Barbara Saltsman, 64, learned after she lost her job as a legal secretary in June. She had planned to work until she was 66, and while she has continued to scour the Web for new jobs, she hasn’t been able to find anything that pays close to her old salary.

“I have 40-something years of experience, and companies don’t want to pay for it,” said Ms. Saltsman, who lives in Chittenango, in upstate New York.

Unemployment benefits were not enough to keep her finances afloat. So she thought she would have to take Social Security two years before her full retirement age, which would have substantially reduced her benefits. But when she visited her local Social Security office, the representative suggested collecting benefits on her deceased husband’s record until she turned 70, when she could switch to her own benefits and collect more.

Some individuals may also benefit from the “file and suspend” strategy, which allows one spouse to file for benefits and then immediately suspend them. Then, the unemployed spouse can collect spousal benefits on the working spouse’s record while his or her own benefits continue to accrue. But this works only if both spouses have reached full retirement age.

TAPPING RETIREMENT SAVINGS You typically cannot pull money out of a company plan like a 401(k), or a traditional I.R.A., until six months after your 59th birthday. Otherwise, you will face a 10 percent penalty on the amount withdrawn.

You obviously want to avoid withdrawing money prematurely. Several financial planners suggest pulling from emergency savings if you have it or other taxable accounts before resorting to retirement accounts. But if you absolutely must tap these funds, some of these methods will help reduce the damage.

DO NOT ROLL OVER YOUR 401(K) If you were laid off the year you turned 55 or older, you should think twice about rolling over your 401(k) or 403(b) into an I.R.A. You can withdraw money from the account penalty-free (though you will have to pay income taxes), whereas you would have to wait until you turned 59 1/2 to use those funds in an I.R.A. This rule does not apply to people who left their employer, say, at age 54, and who want to pull money out at 55.

TAP YOUR ROTH I.R.A. You can pull out all of your Roth contributions — but not the earnings — at any time and for any reason, free of tax and penalty. (If you converted a traditional I.R.A. to a Roth, that money could be pulled out, too, as long as it had been in the account for at least five years; each batch of money converted starts a new five-year period.)

PAY FOR HEALTH INSURANCE If you are out of work, you can also take an early, penalty-free distribution from your company plan, like a 401(k) or I.R.A., to pay your health insurance premiums. To qualify, you need to have received, or be receiving, state or federal unemployment benefits for 12 consecutive weeks, according to Ed Slott, an I.R.A. expert and the author of “The Retirement Savings Time Bomb ... and How to Defuse It” (Penguin, 2003), though self-employed people are also eligible. Another caveat: You need to pay for your insurance during the year you received unemployment benefits or the year after.

In fact, paying for health insurance before you are eligible for Medicare is probably one of the biggest challenges of joblessness. Mr. Gottfried suggested looking at high-deductible plans used in conjunction with a health savings account, which allows you to set aside money tax-free that can then be used for medical expenses and premiums.

“That might tide you over, especially when most of those H.S.A.’s will allow a transfer from a traditional I.R.A.,” he added. “Or, if you put money into an H.S.A., you receive a deduction.”

ANNUITIZE YOUR I.R.A. OR 401(K) A tax break known as the 72(t) rule will also allow you to withdraw money without penalty from a 401(k) or traditional I.R.A. Using this method, you must withdraw a “series of substantially equal periodic payments” over a five-year period or until you reach age 59 1/2, whichever is longer. The payout is determined by your life expectancy or the joint life expectancy of you and your beneficiary. But you cannot change the payment schedule — otherwise, you will have to pay the 10 percent penalty.

Do not, I repeat do not, rush into this decision without professional guidance. Not only do you run the risk of seriously depleting your I.R.A., but if you find a job and no longer need the money, there is no turning back.

“Once you take the payments, you can’t roll them over back into your I.R.A.,” Mr. Slott said. Nor can you convert that money to a Roth account. “You are stuck with it.”

Financial planners offered many more ideas, from borrowing money from a spouse’s 401(k) to refinancing a home and taking some cash out (if you have the equity), as well as bartering or taking over day care duties for the grandchildren. And several planners suggested that they expected to see more families moving in together.

Whatever you decide, think long and hard about the consequences and how the decision may affect your long-term savings.

“At 55, there are 15 to 20 more years left to get back into work,” said Joseph R. Birkofer, a financial planner in Houston. “It may take a while, but there really isn’t another choice.”

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